Trying to Deduct Some Sense From Tax Reform

Well, did I call it about Republicans being at each others’ throats over the “State and Local Tax Deduction?”

So far, I have only heard ONE Republican – that would be Senator Tim Scott from South Carolina – call that deduction for what it is – A SUBSIDY THAT THE REST OF US PAY TO ALL THOSE HIGH-TAX BLUE STATES. More about that in a minute.

Having trouble understanding all this controversy about “brackets” and why they are so important? “Brackets” are a feature of a “progressive income tax.” A “progressive income tax” is based on the principle that the more you earn, the higher the percentage of your income you should pay to the federal Government in tax.

Compare this to a “flat tax,” which is based on the principle that everyone – everyone, including corporations – should pay the SAME percentage of their TOTAL income to the Government in tax and ONLY PAY IT ONCE (presently U.S. Corporations pay income tax on their “profits” at the highest rate in the world, and their shareholders pay income tax on the SAME profits AGAIN when they are distributed in the form of “dividends”).

A “progressive income tax” is the embodiment of the “Soak the Rich” philosophy adopted by the federal Government since FDR, and, in its present form, more than a third of the citizenry DOESN’T PAY ANY INCOME TAX AT ALL. Therefore, they have absolutely “no skin in the game.”

The concept of “brackets” is actually fairly simple, when you grasp the proposition that different levels of “taxable income” are taxed at different RATES. Of course, figuring out one’s “taxable income” is an entirely different can of worms, which I’ll save for Lesson 3.

Anyway, to keep it simple, let’s just say we are dealing with a purely hypothetical five (5) “brackets” – 10%, 15%, 25%, 35% and 40% – and that each “bracket” is exactly $20,000 in “taxable income.” This means that the income tax on the “first” $20,000 in “taxable income” is $2,000 (10% of $20,000).

However, income tax on every dollar in the next “bracket,” the “15% bracket,” is calculated at 15%. When your taxable income hits $40,000, income tax on the very next dollar is calculated at 25%, and so on, up to $60,000, after which the rate goes UP to 35%. Your total tax is the sum of the income tax calculated in each “bracket.”

So, in this fictitious scenario, if one had “taxable income” of $50,000, his income tax would be $7,500 – he has $20,000 in the “10% bracket” (tax = $2,000), $20,000 in the “15% bracket” (tax = $3,000) and $10,000 in the “25% bracket” (tax = $2,500). Thus, his total tax is $2,000 + $3,000 + $2,500 = $7,500.

Now you know all there is to know about the “concept” of “brackets” and know that, as a practical matter, what is important is (1) where each bracket starts and ends and (2) the rate applicable to each bracket.”

Of course, I’m a flat-tax guy, so I have heartburn over the “bracket concept” at a fundamental level (and it looks like I’m stuck with it), but the real heartburn comes from the way the Government tinkers around with these brackets and calls it “tax REFORM.”

All the Republicans are doing now for individual taxpayers is attempting to change the starting and ending points of the brackets and the rates applicable to each one to “produce a tax cut for the middle class.” They may succeed.

But so long as the “Top 50% of income earners” (those earning over $39,275 per year) are paying 97.17% of the income taxes collected by the federal Government, we not only have no “Tax Reform,” we are still sitting on a time bomb expecting to hatch a chicken.

Up until now, the citizens of these states have elected legislatures and governors who have spent their money like water on everything under the sun, various forms of welfare, illegal aliens, “free” education for new generations of “social justice warriors” who can’t make change and Cadillac pensions for state employees. And who tax the hell out of them to do it.

Up until now, they have gotten to take these ridiculous taxes “off the top” of their “taxable income” for federal income tax purposes, which is the income that is taxed at the very highest rates. Now, they may have to move to a more fiscally responsible state or start electing some different people, or continue screaming at the sky or crying in their beer.

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